EVENTS

Intuitive heuristics

Daniel Kahneman explains that there is such a thing as the affect heuristic,

where judgments and decisions are guided directly by feelings of liking and disliking, with little deliberation or reasoning.

The example he had just given was the chief investment officer of a large financial firm, who told Kahneman he had just invested tens of millions of dollars in the stock of Ford Motor Company. Why? He’d gone to an automobile show and been impressed by Ford cars. “Wo, good cars!” Yes but that’s not the relevant question. The relevant question is whether the stock is currently underpriced.

The cio did an affect heuristic thing – which is pretty funny, really, given his job. But the thing is, Kahneman explains, the relevant question is more work to answer correctly than the irrelevant one.

When the question is difficult and a skilled solution is not available, intuition still has a shot: an answer may come to mind quickly – but it is not an answer to the original question. The question that the executive faced (should I invest in Ford stock?) was difficult, but the answer to an easier and related question (do I like Ford cars?) came readily to his mind and determined his choice. This is the essence of intuitive heuristics: when faced with a difficult question, we often answer an easier one instead, usually without noticing the substitution.

Thinking, Fast and Slow p 12

I love that final half-sentence. I’m going to set it off by itself so that we can admire it in all its glory.

when faced with a difficult question, we often answer an easier one instead, usually without noticing the substitution.

This stuff is a little disquieting. None of us is immune to these heuristics. It makes me wonder if humans really can be entirely sceptical.

Dare I use the word? I’ve dialled back on the stridency of my own atheism and scepticism over the last few years. I’m a lot more patient. It’s easy to spot and criticize these heuristics in others. Not so easy in one’s self.

Smokey Dusty – I know. Part of why I like that phrase so much is I recognize it. I’m sure I do it all the time. I recognize that little wobble from the hard question to the easier one. Trying to think for a couple of seconds and then oops, wobble, suddenly you’re on an easier question.

I think his point is fine but his example was badly flawed. If you’re looking at whether or not Ford stock is a good buy it’s extremely important to see if they’ve got good new products which are likely to result in greater than normal sales. The underlying stats about Ford’s value are likely to be widely known and generally counted into the stock price already. So the question is are the new models the same ol’ same ol’ or are they something that will get people excited enough to buy?

This is like the guy whose job it is to taste test the new fast food bacon-laden products to see if it looks like they’re winners (actual job); if they are likely winners than pork belly futures are a good buy because fast food outlets buy enormous amounts of bacon when they have such a product take off.

Same right now with RIM’s new Blackberry. People try it out and see if it looks like a potential big seller (apparently not; too little too late syndrome). People bought the stock and ran it up lately based on speculation, but the key is whether or not they have a good product coming out.

Hi, anthrosciguy. The point is not that the quality of Ford’s products is irrelevant to how well Ford will perform as an investment, it’s that it’s one small, easy to decide part of the assessment and not the whole, messy conundrum. A brief look at the history of business will quickly reveal that there are plenty of examples of great products that failed financially (Betamax, the Chevy Nova in Latin America, the Iomega Zip Drive, Fight Club) and plenty of awful products that sell very well indeed (homeopathic remedies, Transformer movies, 99% of fast food).

Chris Lawson, while the point you make is very good (and I have a story of my own which would back you up), the Chevy Nova actually did quite well in Latin America (see Snopes and Wikipedia) despite the inevitable “no va” jokes.

Chris, I have to disagree with the specific example again. The other parts of the equation vis a vis Ford stock as a good investment are things that are going to be well known to the investment community, esp. a professional investment firm. The remaining question then is if they have products that people are going to be excited enough to buy. It’s not that he didn’t concern himself with any of the rest (if that was the point of the example then it was even a worse example than I thought, because it’s nonsense to think an investment firm wouldn’t get, in fact already have, this info — it’s extremely easily available). It’s that this was the only remaining question about the stock’s future: do they have products that people are going to be excited enough to buy. So it was a bad example to use to make a good point, because the example doesn’t fit.

And on the subject of bad examples, besides the real facts about the Nova bad jim mentioned, the Zip drive did very very well, and Iomega did very well with it, until it was superceded by newer tech and Iomega didn’t keep up.